7 minute read 17 Aug 2020
Equalisation Levy on Ecommerce operators

Equalisation Levy: A critique on India’s unilateral measure

By EY India

Multidisciplinary professional services organization

7 minute read 17 Aug 2020

Indian government has introduced Equalisation Levy (EL) on consideration received by non-resident e-commerce operators for e-commerce supply or services at 2%, which came as a surprise.

Novel coronavirus (COVID-19) and measures to control it have caused widespread disruption this year. While governments, businesses and people across the world are battling COVID-19, Government of India has introduced Equalisation Levy (EL) on consideration received by non-resident e-commerce operators for e-commerce supply or services at  2% (hereinafter referred to as ESS EL) at the enactment stage of the Finance Bill 2020, around the end of March and, with effect from 1 April 2020.

The first due date for payment of ESS EL was 7 July 2020. The move did come as a surprise since India is an active participant in OCED’s Base Erosion and Profit Shifting 2.0 (BEPS 2.0) Pillar 1 project which is aiming to build a global consensus on taxation of digital/digitalized economy. Thus, a unilateral measure without any prior consultation or a detailed memorandum has created significant anxiety amongst taxpayers. The move also got international attention and the US Government announced a Section 301 investigation under the Trade Act, 1974 which will focus on issues such as discrimination against US companies.


“E-commerce supply or service” has been defined in the provision of ESS EL to mean online sale of goods or online provision of services or facilitation of online sale of goods or provision of services. The levy is triggered on consideration received by a non-resident (NR) e-commerce operator on the above transactions from a person resident in India. ESS EL is also applicable if the consideration is received by the operator from an NR for (i) sale of advertisement targeting an Indian resident or a customer who accesses the advertisement though internet protocol address located in India and (ii) sale of data, collected from an Indian resident in India or where the NR avails the supply or service using an IP address located in India. Further, “e-commerce operator” has been defined as a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.

ESS EL is not applicable where the consideration is related to permanent establishment of the e-commerce operator or subject to advertising EL (applicable @6% in such cases) or is less than INR 20 million per annum.


The ESS EL appears to tax digitalized products/services since the provisions refer to taxing consideration for online sale of goods and online provision of services. Thus, digital offerings of NRs such as online books/online games/online gaming services (under specified circumstances) come under the purview of ESS EL. Similarly, if an e-commerce operator, such as an online marketplace, earns a service fee from an Indian resident for selling its goods or services online, the fee earned by the marketplace would be subject to ESS EL. Where the e-commerce operator is merely a facilitator of goods or services, it may be fair to restrict the amount of consideration (subject to ESS EL) to convenience/ facilitation fees charged by the operator and not the value of services which it facilitated. Take the example of an NR platform owner (the operator) which provides guests with options of accommodation by listing hosts on its platform. Out of the payment made by the guest, only the fee retained by the operator should be subject to ESS EL and not the amount it passes on to the host. Any other view would create an anomaly leading to bringing offline services within the ambit of ESS EL.

As is evident, the provisions pertaining to ESS EL are widely worded and one could also interpret them to cover sale of physical goods as also services enjoyed offline. Illustratively, while many businesses negotiate supply and service agreements online and use digital / electronic means for confirming contracts, the delivery of goods and/or services is largely offline. An example of this could be orders placed online for commodities such as oil on an e-portal. Further, pure traditional brick and mortar businesses (like construction) also use digital or electronic facility in some form, such as for maintaining a website, displaying online catalogues to drive traffic into their stores/ inquiries, using email for correspondence, digital forms of payment etc. The intent cannot be to bring billions of dollars of such transactions within the ambit of ESS EL.


Given the varied interpretations, it might be imperative for the Indian tax authorities to provide following clarifications /modifications to remove the ambiguities:

  • It should be clarified that ESS EL is restricted to digitalized products and services and does not cover goods and services which are physical in nature/services which are enjoyed offline and where e-commerce merely facilitates communication, placement, conclusion or delivery of order.
  • ESS EL is to be levied on the actual consideration that belongs to the e-commerce operator in their own right as against the full amount received. For instance, for operators acting in the capacity of intermediary/marketplace, the commission or fee they retain is the only consideration that should be considered for the purpose of this levy.
  • Amount of consideration received or receivable by the e-commerce operator should be restricted to only convenience fees or facilitation fees received from residents in India or non-residents using IP address in India. It should not cover convenience fees received from non-residents.
  • The expansive language of the provisions could potentially cover a wide gamut of transactions between non-residents such as a situation where an online advertisement is merely accessed by persons in India, who were not the target audience for such an advertisement at first place. Further, through advertisements, enterprises may intend to target markets region-wise rather than a specific country (say, India). This creates a complexity as to how much consideration for the sale of advertisement shall be allocated to persons accessing the advertisements in India and outside India. It would be useful for taxpayers to get clarity on the scope and exclusions from the provision and rule out the possibility of it extending to unintended situations.
  • As a result of expansion of scope of EL to ESS EL, section 10(50) of the Income-tax Act has been amended to state that income arising from any "e-commerce supply or services" on or after 1 April 2021 and chargeable under EL chapter shall be exempt from income tax. On the other hand, the ESS EL provisions apply from 1 April 2020. This seems to be an inadvertent error and suitable amendment should be made to section 10(50) to make it effective from 1 April 2020.
  • Specific appeal remedy/ dispute resolution provisions should be included.
  • Where the non-resident e-commerce operator pays ESS EL with the understanding that it has no Permanent Establishment (PE)in India, but tax authorities subsequently dispute existence of PE amount of ESS EL should be allowed to be adjusted against tax payable on such disputes.
  • Various countries including India are working on the BEPS 2.0 Pillar 1 project for providing for additional taxing rights. ESS EL provisions should be amended such that a credit of ESS EL is provided to companies towards any incremental tax in future that maybe due on account of Pillar 1 project.

ESS EL is likely to be cost of doing business without ability of claiming tax credit in home country. Impact maybe even more significant on businesses where the margins are slender, or the businesses are operating under losses. While everyone was eagerly waiting for clarifications/ modifications and deferment of the applicability of the ESS EL, none has been forthcoming. India is a flourishing digital economy with billions of dollars of foreign investment flowing in. Even if the government provides clarifications or makes amendments to provisions pertaining to ESS EL now, it would provide some clarity and certainty to investors. In the absence of clarifications, one would need to take a position basis the interpretation of the statute and brace for litigation.

(This article is authored by Vishal Malhotra, Partner and National Leader, Tax – Technology, Media and Entertainment and Telecommunications, EY India.)

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Chapter 1

Media & Entertainment sector: Disrupted by Covid-19 pandemic

Lack of clarity on the meaning of ‘targeted advertisements’ in relation to transactions involving non-residents might lead to unintended interpretation.

The media and entertainment (M&E) sector, which was about to get into a hyperdrive, has been adversely impacted by the COVID-19 pandemic. The stoppage of content production, cuts in advertising spending and cancellation of sports events has stunted its growth. Implementation of Equalization Levy (EL) has further added an additional financial burden on the sector. 

Business-to-consumer (B2C) services, such as content streaming services, online gaming services, database services, etc., which were already covered under the Goods and Services Tax (GST), are now chargeable to EL. Payments made by the Indian entities in lieu of commercial rights to distribute offshore digital services/products may also get covered under EL.

Cases involving intermediaries who are collecting monies on behalf of sellers (such as app stores collecting on behalf of gaming companies or streaming platforms) invite ambiguities. It is not clear which entity qualifies as an e-commerce operator (app developer/publisher or their intermediary or both) and whether EL is required to be discharged on the gross monies collected or only on the collection fees charged by the intermediaries.

Lack of clarity on the meaning of ‘targeted advertisements’ in relation to transactions involving non-residents might lead to unintended interpretation. The revenue allocation methodology to determine revenues from advertisements targeting the Indian customers is also a challenge in case contracts cover multiple countries. The nature of data intended to be covered under the sale of data limb should be clarified along with whether the provision should be interpreted in a strict sense or other forms of data exploitation (such as licensing) are also included. 

The scope of EL is very wide and the industry expects the government to provide more clarity on it. The industry also hopes to see the government waive off the interest on non-payment of first quarter instalment of EL liability by 7 July 2020.

(This section is authored by Rakesh Jariwala, Partner - TMT, Digital, International Tax and  Transaction Services, EY India.)

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Chapter 2

The interplay of the Equalisation Levy and transfer pricing

The arm’s length principle has proven useful as a practical and balanced standard to evaluate transfer prices between associated enterprises.

Transfer pricing (TP) provisions provide that arm’s length return for an entity should be determined basis the functions performed, assets employed, and risks assumed by the contracting entities. Characteristics of property transferred or services, contractual terms and conditions prevailing in the market are additional factors that are considered while evaluating comparability of third-party transactions with related party transactions. Thus, the arm’s length principle has proven useful as a practical and balanced standard to evaluate transfer prices between associated enterprises.

However, tax authorities have argued that market or demand related factors are not considered in such arm’s length analysis. Their argument has been that aspects such as value of data, user contribution and network effect are not considered in the current TP analysis and thus entities in market jurisdictions such as India should earn some additional profit beyond that earned by comparables. A contrary argument is that these market factors are not owned by any entity and thus return allocable to them should not belong to any particular entity as these factors are common for all companies. Impact of such factors is built into the margins of comparables. Thus, no additional remuneration is warranted for these factors and a proper application of the arm’s length principles and the various value creation concepts would allow allocation of correct profits between two associated enterprises.

While the jury is still out there on the above issue, Equalisation Levy (EL) was introduced in 2016 to cover online advertising services and the scope has been expanded in 2020 to cover online sales of goods and provisions of online services. The rationale for the same has been that the levy takes into account the market factors discussed above and to bring to tax the income otherwise not taxed. Thereby, with the introduction of this levy, taxpayers may argue that there should be no further attribution to the Indian entities supporting non-resident operators paying the EL on account of market factors such as data, user contribution, network effect. They should only be remunerated for the functions performed, risks undertaken and assets employed by them basis the current transfer pricing provisions.

(This section is authored by Vishal Rai, Partner, International Tax and Transaction Services, EY India.)

(Chapter breaker)

Chapter 3

Scope and timing of the equalization levy and suggested modifications for the financial services sector

In line with the global approach, an exclusion for financial services players from EL in India will be a welcome relief especially during these stressed times.

The current Equalization Levy provisions do not provide for any industry or sector specific exclusions. The widely worded provisions are likely to have undesired consequences especially for the financial services (FS) sector.

There are various factors which distinguish the functioning of the FS industry from other sectors. They necessitate the need for a specific carve out from the scope of EQL. These factors include:

  • The functioning of the FS industry is highly regulated. The accounting/ reporting requirements, on-boarding of clients, sources of income, etc. are closely monitored by regulators. This creates an additional layer of regulatory supervision on their service offerings and incomes earned/ generated in/ from India
  • Given the regulatory need (in most situations) to operate through a local incorporated entity or local branches, even where the services are rendered digitally, the origination of the transaction or relationship with local customers typically is with the local entity, resulting in profits of service offerings being taxed in the local jurisdiction on an arm’s length basis
  • A large portion of the digital services rendered by offshore financial services entities are rendered to their Indian Group companies. These are subject to GST (under the reverse charge mechanism) and in many cases even subject to withholding tax. This levy will further increase the cost of rendering services from India 
  • Several countries (such as UK, France, Italy, Spain and New Zealand)1 have provided/ are in the process of providing exclusions to the financial services players from a levy similar to EQL. In line with the global approach, an exclusion for FS players from EQL in India will be a welcome relief especially during these stressed times.

(This section is authored by Hasina Chhil, Partner, Tax and Regulatory Services, EY India. Bhargav Selarka, Senior Manager, EY India also contributed to this section.)

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Chapter 4

Manufacturing sector: The digital vs physical debate

Any levy of e-commerce supply or services EL coupled with potential non-availability of credit of ESS EL in a supplier’s home country could result in increased cost of imports.

The biggest issue in the manufacturing sector pertains to import of raw materials and other goods, especially where orders are placed via an electronic platform. Should e-commerce supply or services (ESS) Equalization Levy (EL) be limited to only digital goods or can it extend to physical goods as well is a keenly debated topic, given the broad language of ESS EL provisions. It was hoped that the Central Board of Direct Taxes (CBDT) would provide clarifications on such aspects. However, applicability to software licensing/intra-group services’ transactions involving digital medium and the corresponding exemption from income tax for FY 2020-21 are also points of deliberations.

Given that physical imports were typically not subject to income tax earlier, any levy of ESS EL coupled with potential non-availability of credit of ESS EL in a supplier’s home country could result in increased cost of imports. This could adversely impact the current pricing of the final products manufactured in India. Conversely, this could also provide a marginal competitive boost to domestic manufacturers. However, due to the pandemic, it is imperative that the government provides necessary guidance regarding the intent and scope of ESS EL at the earliest so as to provide clarity to the industry.

(This section is authored by Pramod Achutan, Partner, Tax and Regulatory Services, EY India.)


The government should provide clarifications or make amendments to provisions pertaining to ESS EL. This would offer some clarity and certainty to investors.

About this article

By EY India

Multidisciplinary professional services organization